The cryptocurrency market has been in turmoil over the past few days, as governments around the world begin to enforce regulations over coin transfers. Bitcoin (BTC) dropped below $10,000 USD on January 17th, for the first time since December 1st (though it is now recovering), and Coinmarketcap has been a sea of red, prompting many reports to describe it as the cryptocurrency ‘bloodbath’. Hyperbolic, maybe, but scary enough if you’ve just invested all the money you were saving up to buy a yacht with.
It’s all very interesting, but amongst all the noise it’s easy to overlook an even more concerning development taking shape within the cryptocurrency industry; one that no amount of smart trading or governmental regulation will fix if we leave it too late.
As we all know, Bitcoins do not come from out of nowhere. Like gold, oil, coal and other valuable commodities, it must be mined. In this case, using computers. And computers tend to use electricity. In fact, according to the Digiconomist’s energy consumption index, Bitcoin mining computers got through around 43.74TWh per year worth of the stuff as of today.
To put that into perspective, many members of the Bitcoin community paid some attention to a research paper from UK-based Powercompare last November, which stated that at the time, electricity usage for Bitcoin mining equated to 0.13% of the entire planet’s energy consumption. This is more than the country of Ireland uses per year. It is more than Nigeria, Africa’s largest economy, uses per year. It is more than 159 other countries in the world use per year. ‘If Bitcoin miners were a country’, say Powercompare, ‘they’d rank 61st in the world in terms of energy consumption.’ All of this speaks for itself, but it’s old news. Because at the time the paper was released, Bitcoin’s energy consumption stood at 29.05TWh.
That means that since late November 2017, less than two months ago, the amount of power used by Bitcoin mining has increased by 50.5%. That is an unbelievable increase in such a short amount of time, and it’s rising exponentially.
As of 28th November 2017, Bitcoin energy use had increased by just under 30% that past month. At that rate, it would consume the entire world’s energy supply by 2020. Considering today’s statistic, this is getting alarming.
If environmental issues don’t tend to worry you, consider that not only is this bad for the planet, it’s bad for trading. China’s recent power restrictions on mining operations is putting pressure on miners who want to continue producing coins. Bitmain, one of China’s leading mining companies, is planning on leaving the country and setting up elsewhere due to the regulations. And even if all the miners do move elsewhere, would other countries happily accommodate such high power demand for long?
Okay, you get it, it’s a problem. So what do we do about it? The issue with Bitcoin’s protocol is that it uses what’s known as a proof-of-work (PoW) consensus algorithm. In essence, this means that every miner must do ‘work’ (using computing power to solve a mathematical problem in order to produce more coins and complete transactions) to add new blocks onto the blockchain system. A block is ‘solved’ every 10 minutes, and out of everyone who tried, only one miner succeeds. They then get the transaction fees and new coins as a reward. The others are informed and their work discarded, despite the colossal power that went into trying to solve the math problem first.
But there is an alternative. Other consensus algorithms, such as proof-of-stake, exist to do essentially the same thing in a different way. With proof-of-stake (PoS), one user (called a ‘forger’ in POS terms) is chosen from a pool to create the next block on the chain, instead of everyone frantically trying to solve a math problem and do it first. This saves an enormous amount of energy. Forgers are chosen based on the stake they have in the system – the number of coins they have and how long they have had them for. They are not rewarded by coins created but they are paid in transaction fees.
And it’s catching on. In fact, some well-known coins with huge market caps have been using PoS for ages. NEO, which normally sits comfortably among the top 10 cryptocurrencies in terms of market cap, currently has a cap of $7.6 billion USD, while the developer-based coin Lisk (LSK) sits on a cap of $2.3 billion USD. Both coins run on a PoS-based algorithm, and, though suffering the same general market price plummet that most cryptocurrencies are, have more value and trading volume than many PoW-based coins.
Up-and-coming alt-coins have spotted the benefits of PoS, too. Philosopher Stones (PHS) coins ranked amongst the top three highest gaining coins on January 17th, while reaching a market cap of $1.63m USD later that week, a stunning increase from $459k a couple of days before. Philosopher Stones use the proof-of-stake algorithm as part of their ‘green mining’ initiative, noting that ‘the only equipment you need for minting new coins is your PC or even laptop’. Interestingly, they allow transaction messages on their blockchain network and also offer a 50% year return reward.
Also, enter EcoCoin (ECO). It is smaller than PHS with a market cap of $235,161 USD but no less ambitious. It, too, uses Proof-of-Stake to validate its transactions. The coin is, in their own words, ‘a cryptocurrency and community focused on protecting and honoring our environment.’ It’s strongly unlikely that this will take the form of storming oil tankers á la Greenpeace, so don’t put off your investments just yet. Since launching, they have made a good deal of progress through their roadmap, establishing Windows and Linux wallets, listing on multiple exchanges and celebrating their website launch. Looking to become a platform for charity donations, recycling rewards, crowd-sourcing and an eco-marketplace, EcoCoin is designed to be a PoS-based coin with a huge audience.
But even if your heart is set on PoW-based coins such as Ethereum (ETH) and Bitcoin, there are still ways to mine them without pushing national grids to the limit. HydroMiner, an Austrian-based Bitcoin mining operation, is making use of disused hydropower reserves in the country to power their servers. In addition, equipment is cooled by the cold mountain water circulating through pipes – a more efficient alternative than conventional air conditioning. Excitingly, they are currently planning an ICO to expand outside of Austria.
We also have Pylon Network, an ingenious Spanish start-up which looks to reward users in its own cryptocurrency for solar power generation. The blockchain-enabled platform will enable the decentralized exchange of green energy for Pylon-coin. In addition, validating transactions will take place with ‘green miners’; servers that are run on excess renewable energy.
It’s easy to overlook the smaller coins and ICOs that are trying to push the industry in a different direction. But it’s all the more reason to think about investing now, while prices are low. It is normal to have doubts about economic viability, but it might be time to start thinking about the bigger picture; whether the giant PoW-based coins are actually sustainable in real terms. In any case, the issue of power consumption is in everyone’s hands, and if it isn’t paid immediate attention, Bitcoin will be the least of our worries.
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